Heineken’s (HEIM) 1Q20 core net profit of RM57m (+7.9% yoy) was broadly in line with expectations. The slight decline in revenue (-1.8% yoy) was largely offset by better margins owing to effective marketing spend as well as price adjustments across selected products effective 1 March 2020. The negative impact from the plant closure and weaker demand due to the MCO should be worse felt in 2Q and we are doubtful of a swift recovery in alcohol consumption post CMCO amidst lingering Covid-19 uncertainties. After rolling forward our valuation base year, we arrive at a higher TP of RM17.70. Maintain SELL.

Broadly Within Expectations

HEIM’s 1Q20 revenue slipped -1.8% yoy to RM515.9m, mainly attributed to a near 50% drop in sales following the imposition of the Movement Control Order (MCO) which started on 18 March 2020. Nevertheless, core net profit came in at RM57m (+7.9% yoy) on the back of an improvement in EBITDA margin to 17.8% (+1.7ppt yoy) resulting from i) efficient commercial spend and ii) price adjustments across selected products effective 1 March 2020. Overall, the results were broadly within our and consensus expectations, accounting for 20% and 18% of respective forecasts.

On-trade and Tourism Channels Feeling the Full Brunt

Sequentially, revenue and core net profit were down 24% and 38% respectively, attributed to early sell-in for Lunar New Year and the imposition of the MCO in March 2020. While Heineken has since 4 May 2020 resumed its brewery operations in tandem with Conditional MCO guidelines, the current ruling allows eateries to operate under strict measures but nightlife channels (pubs, nightclubs, etc) remain out of bounds at this juncture. Based on our back-of-the-envelope computation, we estimate 2Q20 revenue could possibly contract c. 30% qoq and 28% yoy.

Maintain SELL

Post CMCO, we foresee alcohol consumption to remain subdued for 2020, as social gatherings/events will likely be discouraged while lower tourist arrivals would further weigh on demand. We made no changes to our earnings forecasts. After rolling forward our DCF valuation to 2021E, we arrive at a higher TP of RM17.70 (implied 2021E PER 18x). In view of the lingering uncertainties amid the Covid-19 crisis, we remain doubtful of a swift recovery post CMCO in alcohol consumption. Maintain SELL.

Source: Affin Hwang Research - 22 May 2020